Band Directors Briefing Band Directors Briefing

 
  cover.jpg
   






Does your board suffer from DBS  
 



 




FREE BOARD HELP:
Click for articles about corporate governance issues drawn from the Bank Directors Briefing "The Director’s Job" monthly feature and other sources



FREE SAMPLES:
Click for sample issues of the newsletter and a subscription form.



 

KEEPING THE "SCANDALS OF THE WEEK" IN PERSPECTIVE

From the July 2002 Bank Directors Briefing. Copyright Simmons Boardman Publishing. For information or to subscribe, call Steve Cocheo, editor, 212-620-7219, scocheo@sbpub.com

 

Contrary to what you might think from reading the nation’s top business publications in recent months, there was a dark side of corporate life before the affairs of Enron, Arthur Andersen, WorldCom, and all the rest came to dominate the news. Both directors and managers–and even politicians–made mistakes, committed sins, and, on occasion, had the wool pulled over their eyes.

Yet it is easy to see how the bombshell announcements that seem to keep coming this year can have directors of companies of any size and type feeling a bit shell-shocked. As fast as the revelations come, Congress holds hearings, the Securities and Exchange Commission strategizes, and the stock exchange chiefs further hone their proposals for improvements to corporate governance.

Hoping to bring our readers something that would balance the sensationalistic headlines, we listened to a recent presentation entitled "Corporate Governance After Enron." The presentation was given at a seminar for bank directors by Joanne T. Medero, managing director & chief counsel, Barclays Global Investors, and Stephen D. Hibbard, chairman of the securities and corporate governance litigation practice at McCutchen, Doyle, Brown & Enersen, LLP, San Francisco. The seminar was sponsored by the law firm.

The following summary of Medero and Hibbard’s discussion makes it clear that, while much has changed at the margin of corporate governance, much has remained the same. The best news in their presentation is that re-emphasis of the basics of corporate governance will stand all boards in the best stead.

It won’t be long before bank directors begin feeling the impact of week after week of coverage of corporate peccadilloes in examinations and visitations by their regulators–if they haven’t felt it already, predicted Joanne Medero, Barclays Global Investors.

"Regulators read the newspapers," the attorney stated, "so you will get questions about such matters as your audit committee’s conduct even before they’ve made it formally into their examination procedures."

Medero suggested that directors will find themselves either directly, or, through management, being asked what steps the bank is taking to improve its corporate governance. It’s possible directors will hear the term "best practices" a great deal, the implication being what corporate governance best practices the bank has or plans to adopt.

Yet, while there’s no doubt that Enron "is a sea change," and that there will be changes in the environment, McCutchen’s Stephen Hibbard said "I’m not convinced those changes are in a substantive way going to be a watershed change."

While it’s true that some of the laws affecting corporate accounting and related matters are under review by Congress, and that some changes are virtually certain, Hibbard doesn’t believe that the essential nature of being a director is going to evolve all that much.

"What you’ve still got here," said Hibbard, "is that all directors are charged with acting in the best interests of shareholders." The building blocks that support that function need to be reconsidered, and directors must reassess the measures they take to make sure that the foundations of the job remain strong.

TWO BASICS OF THE DIRECTOR’S JOB

Directors classically have two key duties above all the rest of the trappings that go with the job, no matter whether they sit on the board of a bank or a paper bag manufacturer.

The first is the "duty of loyalty." This is the duty to avoid putting personal interests ahead of the bank’s interests at the expense of the bank’s interests. It is the duty to avoid conflicts of interest and self-dealing. This duty also includes the obligation to keep one’s mouth shut regarding information about the bank and its customers that one has obtained in the course of serving as a director.

This duty, in short and in FDIC’s words, is the duty to "administer the affairs of the bank with candor, personal honesty, and integrity."

The second key duty is the "duty of care." This duty gets at the decisionmaking aspect of being a director. There is an obligation to monitor–not run–the bank’s operations, to obtain complete information when making decisions regarding oversight of those operations, and to use sound processes when arriving at those decisions. Overall, this duty demands prudence and diligence.

"The director’s real job is to ask questions," said Hibbard. "You are not charged with managing the daily affairs of the corporation if you’re a nonmanagement director. Your role is to watch."

THE BUSINESS JUDGMENT RULE

If the duty of loyalty and the duty of care are carried out properly, then directors have traditionally been protected by the "business judgment rule," said Hibbard, "and that’s not going to change."

Though it is not 100% watertight, the business judgment rule is a legal principle which holds that, in making a business decision, the directors of a corporation act on an informed basis, in good faith, and in the honest belief that the action they take is in the best interests of the company they serve.

Courts may not be able to understand a bank’s specific plan or strategy, said Hibbard, but a board that takes steps to make it clear that it always follows a logical course in reaching decisions stands a better chance of defending them than one that can’t do so.

"Courts understand process," said Hibbard. "They may not understand how you and your fellow directors can intuitively look at an idea and discover that it’s not really right for the bank, but what they can do is observe how many people were present when a decision was made, how much time they spent discussing the issue, who asked questions, what kinds of questions they asked, and, more importantly, what questions were not asked."

Hibbard acknowledged that some business decisions may seem like matters of no debate with obvious solutions. However, he said, a wise board will still go through the drill of giving each decision item on its agenda its due–reviewing relevant materials, considering questions, and finally reaching the decision.

"It is important that you are able to document that you gave a matter careful, deliberative thought," said Hibbard. "Don’t have a ten-minute board meeting."

Much as going through such a definitive process may seem a bother when everyone seems to be on the same page, Hibbard noted that not all directors necessarily really understand an institution’s business plan. More than once, in court, said Hibbard, he has worked with directors who were asked by opposing counsel to simply explain the current business model of the company that they serve–"and they can’t do it."

Thinking back on such cases, Hibbard recalled, "they can ‘sort of’ give the questioner an idea of the model, indicating that they basically understand it. But remember, they are a director of their company. They are supposed to know the business."

Of course, examiners, enforcement agencies, and lawyers see companies’ and boards’ efforts in hindsight, and the records of those efforts are what will ultimately demonstrate how seriously and carefully a board discharged its duties. Medero recommends developing a more-detailed minutes process to ensure that boardroom discussions are fully reflected for those coming after the fact.

BEEFING UP YOUR BOARD’S EFFORTS

The troubles of Enron and other headliners are far away from most bankers and bank directors. However, directors who see the current crop of business disasters as a call to redouble their efforts can follow action points covered in the two lawyers’ presentations:

(1) Spend more time on the job. Medero told her audience that she’d recently met one of the vice-chancellors of the Delaware Court of Chancery. (Most U.S. corporations are Delaware corporations and that court’s rulings affect not only those companies but also those in states whose laws or courts recognize the importance of Delaware corporate law.) She said he’d told her that he thought that directors should spend at least 200 hours a year, in total, on all aspects of their director duties, including preparation, meetings, and follow-up on meetings. While Hibbard personally thought that 200 hours would be a great deal of time for many banks’ directors, he held up Medero’s conversation as an example of how much more seriously directorship will be taken.

(2) Be generally aware of the laws and regulations that affect banks. Medero noted that regulators want to be assured that board members are generally familiar with the rules and will, when meeting with a board, sometimes throw in a few queries to test such awareness.

"A surprised regulator is generally an unhappy regulator," she warned.

(3) Understand the bank’s critical accounting policies. Few banks, especially community-sized banks, face the convoluted accounting issues that helped bring down Enron. But there are still basics that bank directors should understand.

Hibbard said this was especially important because so much emphasis is being placed on audit committees since the Enron debacle.

"That doesn’t mean that the other directors who don’t sit on the Audit Committee can simply tell themselves, ‘Oh, that’s their job, the Audit Committee’s going to take care of that job’," said Hibbard.

First off, said Hibbard, "you shouldn’t assume that the Audit Committee will ‘take care it’."

Secondly, he added, "don’t delegate your responsibilities for understanding the finances of the bank to the Audit Committee. Every director should know the key accounting policies of the company on whose board he or she sits."

(4) Keep asking questions. "If you don’t really understand something, ask," said Hibbard. "That’s your job. And if you get an answer that you don’t fully understand, follow up."

To directors who have been in meetings with directors who seem intent on getting a full education right there during the board meeting, that advice might cause a shudder or two.

However, Hibbard said, "you don’t have to follow up in the board meeting, per se, but instead as possible."

Hibbard also stressed that he didn’t intend to imply that directors, in seeking answers to questions, become belligerent or confrontational. "It’s simply being informed," he explained.

(5) Don’t fight with management. It seems to be part of the human condition that we have trouble with moderation. We swing between extremes and have trouble finding a middle way. Along these lines, Hibbard noted that the current, post-Enron atmosphere is full of articles and experts who would set board members at odds with management.

An adversarial relationship is not the ideal, according to Hibbard. An attitude of teamwork based on communication is more like it.

"This is to say," said Hibbard, "that you should be informed and not be a potted plant nor a rubber stamp."
 

This website copyrighted 2002 by Simmons Boardman Publishing Corp. All rights reserved.